German business sentiment unexpectedly declined the most in more than four years in August in a sign that companies are waking up to the consequences Britain’s decision to quit the European Union will have on the economy.
The drop in the key Ifo business climate index enforces the concern company executives from Siemens AG to Thyssenkrupp AG have raised in the previous weeks: Political uncertainty related to Brexit and a range of other crises in the region threaten to damp so-far solid growth in Europe’s largest economy. Business sentiment in France, whose recovery ground to a halt in the second quarter, also slipped this month.
Policy makers have sent signals of confidence in the aftermath of Britain’s vote. Germany’s Bundesbank is predicting solid and broad-based growth in the coming months, and European Central Bank President Mario Draghi said in July that he expects the recovery to proceed at a moderate pace. That outlook may change in early September, when the ECB publishes new economic projections.
“Heightened uncertainty about the future of the European Union will hamper domestic demand in the euro area,” David Powell and Dan Hanson, economists at Bloomberg Intelligence in London wrote in a note. “The diminished clarity will probably be enough to see the growth outlook downgraded in September. Adding to that the potential for weaker external demand could prompt the Governing Council to tweak its policy stance.”
Economists surveyed by Bloomberg in the run-up to the previous ECB meeting predicted an increase in stimulus as early as September, with options ranging from an expansion of quantitative easing to another cut in the deposit rate.
Since then, economic data had painted a picture of relatively resilient growth. A gauge of private-sector activity in the euro area unexpectedly improved in August, business confidence increased in July and inflation continued to inch higher.
On Thursday, the Munich-based Ifo institute reported that Germany’s benchmark business climate index plunged in August to 106.2—a six-month low—from 108.3 in July, with gauges for current conditions and expectations down. The survey is based on about 7,000 responses from firms in manufacturing, construction, wholesaling and retailing.
Signs of waning confidence tally with the cautious tone from company executives in recent weeks. Their warnings came even as earnings at the nation’s blue-chip firms beat estimates by more than 10 percent in the second quarter, when the economy expanded more than analysts predicted.
“It is not the first time that the Ifo reacts with a delay of one or two months to global events,” said Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt. The survey “is a good reminder that the relatively benign reaction of euro-zone data to the Brexit vote should not be taken as given. The negative confidence impact is for real.”